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401(k) Auto Features Impact Communication Strategies

#Stephen Miller, CEBS

By Stephen Miller, CEBSJul 25, 2012

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There is hope that Americans will be better prepared for retirement, thanks to automatic features offered through 401(k) and other employer-sponsored defined contribution plans, according to Retirement Plan Communication in an Auto Features World, a study report from benefits provider Lincoln Financial Group and Retirement Made Simpler, a coalition to support employers who want to help their employees save more for retirement.

The survey was fielded from Feb. 8 to March 8, 2012, with responses from executives responsible for managing 401(k) and 403(b) retirement plans with assets of $10 million or more. Respondents had implemented at least one automatic feature, including automatic enrollment into qualified default investment alternatives (QDIAs) such as target-date funds, and annual automatic escalation of salary deferral rates.

The study found that 94 percent of respondents recognized the success of automatic enrollment features in helping them address their plan-related goals, and found these features drove higher participation and deferral rates along with better investment performance. However, only 51 percent of sponsors said they offered customized communications and only half had revamped communication materials since the introduction of auto features.

Increased Retirement Readiness

The report noted that automatic features had improved employee retirement readiness and that:

• 85 percent of plan sponsors reported that automatic features were especially effective in helping participants who consider themselves less educated on retirement matters.

• Plans with automatic escalation, typically raising salary deferrals by 1 percent or more annually, experienced average deferral rates of 8 percent or higher compared to the average deferral rates of 4 percent or less for the majority of plans, according to separate research by the not-for-profit Plan Sponsor Council of America.

• 97 percent of plan sponsors who adopted the bundle of automatic enrollment, QDIAs and automatic escalation said the advantages outweigh any perceived disadvantages.

Adjusting Communications and Education

"Just like any other plan design innovation, auto solutions do not mean you can simply ‘set it and forget it,’” said Chuck Cornelio, president of retirement plan services at Lincoln Financial Group. “Employees need personalized and outcomes-based communication and education to meet their goals and boost their retirement readiness."

Plan sponsors agreed that employee communication must shift significantly when automatic features are adopted. That means moving away from education that is technical in nature—such as how to enroll or the investments offered—to engaging participants in a more meaningful discussion about their individual savings behaviors and strategies such as their future monthly retirement income, spending power and projected retirement lifestyle.

"Conversations need to be more personalized and address employee's specific needs, goals and lifestyles," said Cornelio. "It's time to take a more proactive approach to how we plan for retirement, with more focus on the connection between our future goals and what it will take to get there."

Appealing to participants on a more personal level would likely increase their overall engagement and interest in their retirement benefits, Cornelio said. "Traditional retirement plan communication tends to answer the question, ‘What is it?’ But as this study shows, we have the opportunity to answer a more impactful question: ‘What’s in it for me?’ The right answer can be a powerful motivator."

Confusion Dominates Many Retirement Decisions

Many defined contribution plan participants are hampered by an “action gap” caused by the disconnect between understanding what is important and knowing how to take action, according to survey results released in July 2012 by State Street Global Advisors (SSgA), an asset management firm.

The biannual SSgA Defined Contribution Investor Survey includes responses from more than 1,000 defined contribution plan participants, who were asked to identify their behaviors and perceptions about saving and investing. The survey uncovered three findings that are especially important for helping employers and employees improve retirement outcomes:

• Elasticity, or flexibility in budgets to save more, was significant.

• Simplicity and repetition were key to engaging employees to help close the action gap.

• Help overcoming the “action gap” between understanding the need to take action and possessing the knowledge to do so.

“Many participants are open to automatic savings increases up to 10 and 15 percent, which is very promising news for employers,” said Kristi Mitchem, senior managing director for SSgA. “We encourage employers to test savings elasticity with their employees and to encourage higher savings rates by implementing savings challenges or by automatically increasing the savings default rate.”

From Confusion to Clarity

In another significant finding, more than half of survey respondents admitted they do not know what target-date funds are, or were not familiar with how they work (typically by shifting fund holdings to more conservative assets over time). Those who did understand target-date funds responded most favorably to a description of the funds that was free of jargon.

“Employers want their employees to be financially successful, not necessarily financial experts,” said Mitchem. “We need to turn confusing tasks into clear steps, not with investment lingo but with simple, clear descriptions and explanations. We also need to take advantage of tools that simplify, like automatic savings and target-date funds.”